2 March 2021

Raising taxes on businesses will harm the poorest workers

By Gavin Rice

How do you plug a monthly spending gap of £40 billion in the middle of a pandemic, following a 10% reduction in the size of your economy, all while avoiding crippling the recovery and keeping a manifesto commitment not to raise tax?

This is the million dollar – or £280 billion – question facing Rishi Sunak. The Chancellor has a reputation as a fiscal hawk, and in spite of a consensus among economists that now is not the right time for austerity, he is anxious to start sending the right signals to the bond markets. But there’s a problem: the Conservatives were returned with a majority in 2019 after a pledge not to raise income tax, VAT or national insurance – the taxes that make up two-thirds of all tax revenue.

The spotlight has fallen on corporation tax. At the very mention of its name eyes usually start to glaze over. One of the most popular taxes among voters, it is also one of the least well understood. A levy on businesses charged just for turning a profit – in addition to the income tax paid by its employees and the capital gains tax charged to its investors – it’s generally viewed as a way of making ‘big business pay its way’. Most people don’t believe a hike would affect them, and for years Jeremy Corbyn’s spinners encouraged this narrative, irresponsibly disregarding the fact that it falls on all enterprises from Goldman Sachs to high street pubs.

Whenever the Treasury hovers its pen over the rate, free-market think tanks rightly chime in with reminders of the well-rehearsed arguments about the damaging effect of corporation tax on economic growth in general. They’re right to do so: Michael Devereux of the Oxford Centre for Business Taxation argues that just a 1% rise can cause a 2.5% reduction in inward investment. What is often missed is the knock-on impact of this on the poorest and most economically vulnerable in our society – those on low wages and most exposed to redundancy.

The sectors that will feel the bite of a rate increase most keenly will be those already operating razor-thin profit margins, including manufacturing and hospitality. These are the sectors most severely hit by Covid shutdowns and where most job losses have fallen. SMEs and high street businesses – already hamstrung by business rates and mounting rents – will be squeezed.

Headline unemployment now sits at 5.1%, but this figure is misleadingly low. In September-November 2020 redundancies hit their highest level since records began in 1995. The true numbers may be masked by the suspension of Universal Credit work search duties, which affects the way unemployment is recorded.

The Claimant Count (claims for out of work benefits) as a percentage of the population has surged above 10% in over 30 constituencies, with shocking rates of over 15% in some parts of Birmingham and the Midlands. Those areas experiencing the biggest increases in unemployment are – you guessed it – the areas with the most out of work to begin with. The OBR’s downside scenario has forecast unemployment hitting 11% by 2022, and it cannot be forgotten that nearly 5 million jobs still furloughed are likely to be at risk.

A hike in corporation tax means many business owners can’t reinvest in their enterprise. It’s money that can’t be paid in dividends to investors which, if paid, would in turn be taxed as capital gains at a higher rate, thus providing more money to the Exchequer. And most importantly of all, it’s money that can’t be spent on wage increases or on taking on new staff. Economists Fuest, Peichl and Siegloch concluded that 51% of corporate tax increases are ultimately passed on to workers, something even accepted by The Guardian. For every job lost or not created, more money must be poured into Universal Credit – there has already been a doubling of the caseload up to 5.9 million since January 2020. If raising business taxes ultimately increases the demand for welfare spending it seems like robbing Peter to pay Paul.

Some say that Britain has among the lowest business taxes in the world, that the money will have to be raised from somewhere, and that it’s politically impossible for Sunak to look to other taxes. Let’s look at those three claims.

The first is only true if you look at the headline rate of corporation tax. If you look at the overall effective rate, there have been no cuts to it. If you take Britain’s business tax regime in the round, it only has the 17th most competitive regime in the OECD, according to the Tax Foundation. Our regressive system of business rates is hugely punitive, with the business rate burden up to eight times higher in Bishop Auckland than in Surrey. Our taxes aren’t only high, they are unfair and increase inequality.

Secondly, is it true that we need to start closing the deficit now? Not a single economist seems to think so. While it’s true that a 1% rise in the interest rates on government debt could increase the cost of repayments by half the defence budget, is a rise of that scale really likely? Rates sit at 0.1% and haven’t risen above 0.75% for years. Contrary to Andrew Marr’s implied premise when interviewing the Chancellor this weekend, government debt is seldom repaid, only serviced. Debt can be stabilised or reduced even while running a deficit provided the cash growth in receipts continues to outstrip debt interest. The impulse to ‘get our spending under control’ could lead to damaging scarring – and ultimately more debt – later on.

Finally, it may be true that the Tories have a political duty not to breach their manifesto. But this was written before the world had heard of Covid-19. They owe an even greater duty to their new working-class voters in the regions most economically ravaged by the pandemic. A corporation tax hike will do nothing for investment in those regions, let alone levelling up. Instead, the Chancellor should be devolving commercial taxation down to a regional level as a step towards redressing Britain’s gaping regional economic divides. Spending money on infrastructure alone won’t help these voters – they need businesses to set up, thrive and provide work.

Britain’s total tax take was over 34% of GDP before the pandemic – already the highest level on record. There is a strong case to be made that Britain is already about as taxed as it can take.

Rishi Sunak is in one of the most difficult predicaments facing any peacetime Chancellor, making the toughest of calls with every decision. In the midst of the chaos he must remember it’s the private sector that provides what Britain’s poorest voters are looking for – jobs. Far from stoking the recovery, a hike could fan the flames of an unemployment disaster.

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Gavin Rice is Head of Work & Welfare at the Centre for Social Justice & a former Special Adviser.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.